4 Data Points that Reveal Contracting Business Red Flags

Guest Post By Dustin Stelzer, Electrician U

It’s easy to get caught in the daily grind and overlook the small details of what makes a contracting business successful. While some of these small details are less harmful than others, by paying attention to a few key data points you may save yourself from going down a tough road.

Here are 4 Data Points that Reveal Contracting Business Red Flags

Fluctuating Profit Margins

Often when starting out, contractors will tend to take on whatever jobs they can get, even if it means coming out net zero after collecting a check.  This may seem like a good idea when starting out, just to get your name out there. However, this ends up resulting in zero growth for future jobs, all while you work your tail off.  

In Texas we call this “running around with one foot nailed to the floor.”  Many new contractors will estimate low because a number just “looks too high” rather than sticking with a set ROI number and being ok with losing the job.  

For example, having a policy that you will not do a job unless you gain 25% will ensure that you don’t work unless it is growing your bottom line.  In addition it will weed out what I call “bad work” – or work that will not give you a return on time, energy, or dollars invested. A good tip from an old school Master of mine was, “If you’re getting every job you bid, you’re too cheap.  If you’re not getting any jobs you bid, you’re too expensive. If it’s about 50/50 you’re in the sweet spot.”

Your Labor Costs are Too High

Having more employees than you need can end up costing you your business.  It is a beautiful picture in your mind to have 3 journeymen, 3 helpers, a superintendent, and an office manager.  But do you have the volume and consistency to match that? Do you have enough saved up to keep someone paid if you end up having a slow season?  Not every job needs a helper/apprentice. Often times startup contractors tend to be in too big of a rush to hire, so they can stop working themselves and get other people to do the work for them.  It’s really not a bad idea to work on your own for the first year, only take jobs you can do yourself, and save up a nice nest egg that you can begin to hire with after 12 months. Keep a solid pace and only take on jobs that you can afford, and that you’re geared up for.  This is a business. It takes years, not months, to grow.

A High Turnover Rate

How long employees stick around is often more of a statement of you or the environment you’ve created, than it is about the type of work they’re doing.  If employees value the relationship they have with you, they’ll trudge through some pretty muddy waters because of the respect they have for you. The cost of training new employees is extremely high, and the learning curve can be over years.  A high turnover rate can and will hemorrhage money from your company.

I should also mention that turnover rate goes hand-in-hand with paying employees what they feel they’re worth, not just what you think they’re worth.  It can almost be stated as fact that an employee that feels well-paid, that is putting in their all, and feels appreciated will not leave a company unless something drastic in their life happens.  Make sure you recognize an increase in turnover, and take it personally. Look at what kind of culture your company has and whether or not you’re making your employees feel like they’re part of a family or like they’re just a cog in an wheel. Good help is hard to find, so when you do…hold on to it!

Your Material Markup is Too Low

A lot of companies pride themselves on not marking up their materials, or only marking up a small percentage.  This can be fine if you have a high hourly rate that you charge on your labor. However many companies have realized the importance in charging a 30%, 50%, or even 100% markup on the cost of materials.  Time procuring materials is time you’re paying for. Nothing in business is free, nor should it be unless you have moral or strategic reasons. A simple 30% markup on 500-1000 jobs over the course of a year can gain you enough profit margin to hire another employee, buy a company truck, or buy that scissor lift you’ve been wanting.  Take seriously the idea of calculating a material markup.

Most customers will expect it, and few will balk at it.  But you don’t have to take the jobs that do. Stick to your target numbers, and don’t do work that is below that number unless you have a justifiable reason to do so.

These are just a few red flags that show you may be headed in a not-so-good direction. However, with some gut instinct and knowing your numbers, you can ensure growth and profitability for your business.